Reason Foundation

Rethinking Telecom Regulation from the Ground Up

Has the digital economy reached a point where all ex ante regulations should be discarded?

Three top free-market policy experts think so. The need for a uniform ex post approach to overseeing the Internet sector as a whole was the rough consensus of yesterday's panel, A New Framework the FCC, sponsored in Washington by The Mercatus Center of George Mason University.

For those not versed in legalese, or were absent the day their Latin class covered prepositions, ex ante regulations are generally prophylactic-they address harms that regulators speculate might emerge from a given course of market action. Conversely, ex post regulation comes in response to a situation where actual harms can be alleged. Network neutrality, being debated again this week on Capitol Hill, is an example of ex ante regulation because it would place restraints on how carriers can manage their networks purely as a precaution against potential abuse.

The Department of Justice's lawsuit to stop the merger of AT&T and T-Mobile, on the other hand, serves to illustrate ex post regulation.

As a jumping off point, the panel used a paper by economist and GMU law professor Jeffrey Eisenach that explored theories of broadband competition. The paper, published in June, challenges the "edge-core" model of the Internet ecosystem, offering instead a more inclusive (and accurate) platform of four "perfect complements:" communications, applications, content and devices. "Take any one out and you don't have [an Internet] product," Eisenach said.

Each one of the four segments has its own group of competitors, as well as a degree of overlap with those in other segments, Eisenach said, yet of the four, only communications is regulated differently-largely with ex ante rules. This needs to change if the digital economy is to reach its fullest potential, he said.

Using this reasoning, Eisenach, along with the other two panel members--Ray Gifford, former chairman of the Colorado Public Utilities Commission, and Georgetown law professor Howard Shelanski, former chief economist for the FCC--said the best reform would move communications companies toward a regime of ex post regulation, in line with the way the government treats most of the other sectors of the economy, including Internet content, applications and devices.

Still, the panel cited some potential dangers, including how aggressive at any given time, U.S might be in antitrust enforcement. Shelanski pointed to the Federal Trade Commission's current antitrust investigation of Google, and the agency's recent statements about Twitter, as troublesome, especially as the FTC has been less inclined to apply a consumer harm test.

Gifford, however, did say that in an ex post regime such as antitrust, there tends to be a greater degree of honesty about what can be known about markets.

There's something to be said for this. Returning to network neutrality, the theory of which hinges on accepting that the outmoded edge-core model still applies, and we see the debate has gone completely off-base. The idea that carrier networks can, let alone should, be prohibited from incorporating any management or QoS functions on data is ludicrous given what applications developers want the network to do. Yet the misperception exists, most recently voiced by Sen. Al Franken, that some Eden-like era of network neutrality once existed and needs to be preserved in order to safeguard innovation.

Compare this to the discussion around the AT&T-T-Mobile suit, where the debate centers on market concentration and spectrum availability. No matter which way you come down on the merger, these are the right questions to consider.